Incorporating is not always a good option when you first start your business. We recommend incorporating once you reach 100k per owner in profit. The biggest reason not to incorporate is for tax reasons. When it comes to a lower income it is better to not incorporate. An unincorporated business is put on the owner(s) personal tax return. If the business is at a loss then this in turn lowers the household income. Which may or may not put you in a lower tax bracket. You can also claim part of your household expenses when you make a profit. We recommend when incorporating paying part of your home expenses but by having the corporation paying you rent. In turn this will have to be a reasonable amount and you will have to claim this on your tax return. A sole proprietorship or partnership is also easier to set up and takes less time and money to register. Doing a tax return for a sole proprietorship or partnership is also several hundred dollars cheaper, as it is done on your personal return. You will have to file only one tax return not two.
Sometimes people may find it in their best interests to incorporate before they reach the 100k thresh hold. For example a client in the medical services profession has many people interested in becoming part of her business solely because of the name. So important is the name in the line of work she is in that many people from out of province and country are interested in it. Celebrities and sports people alike are searching for people when they come to town, and with a good name like the one she has it brings in lots of clients. To protect the name and her livelihood she decided to incorporate on the Federal level.
When you do incorporate the corporation will be considered a separate entity and you won’t be personally responsible. At the time of this writing tax rates are lower for corporations. But with each new budget things can change. Also with corporations it may be easier to get loans. Some lending companies won’t lend out to a business that aren’t incorporated, or without assets. You can also sell shares in the corporation to raise money. Do keep in mind that the owners of the corporation are not allowed to collect EI should the business fail. So extra insurance for such a scenario may be warranted.
Good practices when incorporating:
- Seek the advice of an accountant to see if it is right for you
- Always put the owners on payroll. instead of Owners Draw. The government wants the taxes right away and considers it stealing from not only the government but from the corporation.
- Get a new bank account under your new business name
- Set up accounting software with your accountants help right away.
- Carefully choose your fiscal year start and end.
- Invest in some business insurance.